Fitch Rates Hydro-Quebec's C$500MM Debentures Series JN 'AA-'
Fitch Ratings assigns a 'AA-' rating to Hydro-Quebec's (HQ) C$500 million debentures series JN. The debentures are due Feb. 15, 2050. This tranche of series JN debentures is in addition to C$5.5 billion presently outstanding and due in 2050. The additional increase is part of HQ's borrowing program for 2012. The bond proceeds will be used to pay for a portion of HQ's capital investment program, refund a portion of outstanding debt and for general corporate purposes.
In addition, Fitch affirms the following ratings for HQ:
--Long-term Issuer Default rating (IDR) at 'AA-';
--$42.7 billion parity unsecured debentures and medium-term notes at 'AA-'.
The Rating Outlook is Stable.
HQ's debt is secured by the net revenues of the consolidated HQ system. Commercial paper notes are on parity with outstanding unsecured debentures and medium-term notes. HQ's bonds and commercial paper are further secured by an irrevocable and unconditional payment guarantee by the Province of Quebec (rated 'AA-/F1+' with a Stable Outlook by Fitch).
KEY RATING DRIVERS
GOVERNMENT OWNED CORPORATION: HQ generates, transmits and distributes electricity with a total installed capacity of 36,971 MW. With over 40% of Canada's water resources in Quebec, HQ is able use renewable generating options and large hydropower projects. The company serves the Quebec market and sells its surplus on wholesale markets in northeastern North America.
PROVINCIAL GUARANTEE: HQ's credit ratings are driven by an irrevocable and unconditional guarantee provided by the government of Quebec. This guarantee extends to both the long- and short-term HQ ratings noted above, and ranks equally in right of payment with all other unsecured obligations for borrowed money of the province of Quebec.
LOW-COST HYDROELECTRIC POWER: On a standalone basis, HQ is an integrated utility with low-cost and largely carbon-free hydroelectric power resources (average of 2.11 cents per kWh [kilowatt hour] production cost for 2011).
COMPETITIVE ELECTRIC RATES: HQ's distribution division, regulated on a cost-of-service basis, maintains some of the lowest retail rates in North America (average revenue per delivered kWh of 6.76 cents as of April 2012). The Regie de l'energie approved a distribution rate decrease of 0.41% (effective April 1, 2011) and another 0.45% decrease for the period between April 1, 2012 and March 31, 2013. While the approval of a rate decrease is a concern, it is offset by HQ's continued solid financial performance.
RESERVOIRS SUPPORT HYDROPOWER OPERATIONS: HQ's hydropower resource base benefits from substantial reservoirs, which help mitigate exposure to variable hydrological conditions.
SOUND FINANCIAL POSITION: HQ has a history of solid financial performance, with debt service coverage ranging from 1.75x to 2.47x for the past five years, and equity-to-total capitalization presently stable at 30.9%.
LARGE CAPITAL PROGRAM: HQ is currently in the midst of a substantial capital program, with associated construction risks related to the build-out of several large hydroelectric and transmission projects through 2020. Positively, the projects are proceeding on time and within budget.
INCREASING LEVERAGE: The capital expenditure program is estimated at $20 billion from 2010-2013. Of this amount, approximately 60% will be debt financed. Leverage will increase to 70% debt-to-capitalization by FY 2013, from 68.0% as of the FY ended Dec. 31, 2011. This level of debt is slightly above Fitch's rating category median of 45%. However, it is supportable at the 'AA-' level given HQ's sound financial position and the provincial guarantee.
FINANCIAL METRICS WILL TIGHTEN THROUGH 2013: Financial metrics have tightened modestly through the capital expenditure program thus far, as projected in HQ's Strategic Plan for 2009 - 2013. That said, they should remain adequate for the 'AA-' rating category.
WHAT COULD TRIGGER A RATING ACTION
QUEBEC PROVINCIAL RATING LINKAGE: The explicit guarantee by the government of Quebec results in a direct linkage between the rating on HQ issued debt and the provincial rating.
HQ is a vertically integrated electric system in Canada, providing electric service to virtually all of Quebec, encompassing roughly four million customer accounts. Ownership of over 36,971 MW of installed generating capacity and 33,630 kilometers of transmission lines places HQ among the largest electric systems in North America.
HQ is comprised of four principal operating divisions:
--Hydro-Quebec Production (power generation);
--Hydro-Quebec TransEnergie (transmission service);
--Hydro-Quebec Equipement et Services partages and Societe d'energie de la Baie James (construction division).
Transmission and distribution services are provided under regulated tariffs, while generation services are unregulated. For FY 2011, the production division continued to supply the majority of HQ consolidated net income, accounting for 64.7% of net margins. For FY 2012, the reliance on net income from the unregulated production division is projected to rise as off-system sales continue to grow.
STABLE FINANCIAL PROFILE
Consolidated net income reached $2.6 billion for FY 2011. This represents a 4% increase over 2010 resulting in an HQ distributed dividend of $1.958 billion to its sole shareholder (the Province of Quebec). Unrestricted cash balances remain healthy averaging 192 days cash on hand over the last four years. A $2 billion line of credit is available to HQ, which should further enhance liquidity to 335 days on hand. Unrestricted cash increased in FY 2011 to $2.28 billion from $1.3 billion in FY 2010. This improvement reflects the more normalized colder winter temperatures, strengthening electricity sales volume within Quebec, and successful cost containment efforts.
Going forward, HQ projects modest annual native load growth through 2013, increasing off-system sales, continued timely progress on its construction projects, and moderate distribution rate increases (2.9% in 2013). With modest debt maturities in 2012 and 2013 of 985 million and 770 million respectively, HQ should be able to sustain cash flow interest coverage in the 1.75x range and equity capitalization of roughly 30%.
Additional information is available on Fitch's web site at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012)
--'Revenue-Supported Rating Criteria' (June 12, 2011).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
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